Sectors to play the govt spend - tractors, agrochemicals, NBFCs that focus on the rural space and FMCG companies
The Budget 2020 gave a fiscal stimulus to the economy by allocating more funds towards rural India, reducing taxes, and abolishing Dividend Distribution Tax (DDT) to boost growth.
Against the backdrop of stagnating farm income and rural demand slowdown, the government has budgeted Rs 1.3 lakh crore for agriculture and farmers’ welfare. This includes an allocation to rural employment scheme (NREGS) of Rs 615 bn, rural roads (PMGSY) of Rs 195 bn, and rural housing (PMAY-G) of Rs 275 bn.
“In the Budget, the government has increased allocation towards agriculture & farm welfare by 32% to Rs.1,343 bn. On the other hand, the Food subsidy budget for FY21 has been increased by 6% and the Fertilizer subsidy budget for FY21 has been reduced by 11%,” Rusmik Oza, head of fundamental research at Kotak Securities Ltd told Moneycontrol.
“If we aggregate all the spending by the central government on rural schemes then it is budgeted to go up by just 11% in FY21. This year’s bumper Rabi output coupled with good farm prices should help improve rural income in the short to medium term. This should help improve rural consumption and also help overall GDP growth,” he said.
The steps taken by the government are in the right direction, but it would take some time for the results to show, suggest experts. Recharge of groundwater table, high reservoir levels and ongoing work on irrigation bode well for the next season, too.
“The timing of support from rural to the overall economy wouldn’t have been better. To put some numbers in context, Maruti’s (barometer of economy or auto sector) volume grew 4.2%YoY in FY19 supported by double-digit growth in rural markets (40% share), while urban demand declined,” Aditya Jhawar, Agri Research – Investec India told Moneycontrol.
“However, in FY20 when rural started showing stress the aggregate volumes fell off the cliff for Maruti. Consequently, kick-start of rural consumption is quite important and is expected to support the broader economy,” he said.
Stocks to play the agri space come from the following sectors: tractors, agrochemicals, NBFCs focussed more on the rural space, FMCG companies having higher penetration in the rural areas, select consumer discretionary companies having a rural presence, home appliances, and consumer durables, suggest experts.
This year’s bumper Rabi output coupled with good farm prices should help improve rural income and improve rural consumption and also help overall GDP growth.
“We believe that the rural stress would ease out in 2020 due to a combination of policy action accompanied by better realization for agri produce to farmers. For the Rabi crop, the sowing acreage is higher by record 9.5% and the prices of certain agri commodities have been moving up steadily in the past few months especially coffee, palm oil, cotton, pulse to name a few,” Gaurav Dua, Sr VP, Head – Capital market Strategy & Investments told Moneycontrol.
“This would aid growth in farm income this year. The Union Budget has also proposed certain beneficial measures; however, the policy measures can take time to reflect and the benefits will be more visible by next year in 2021,” he said.
We have collated a list of stocks from various analysts that stand to benefit the most from the expenditure done towards rural India:
Expert: Aditya Jhawar, Agri Research – Investec India
Rallis India is our top pick in the domestic Agro Chemicals space. Rallis’s encouraging performance of both domestic (54% share) and export businesses (46% share) drove a robust revenue growth of 28 percent YoY in Q3FY20.
Although, its renewed strategy has set Rallis’ outperformance vs peers on track, supply-side issues from China had taken a toll on margins, and consequently, earnings, until Q3FY20.Despite the recent run-up in Rallis’ share price of over 30 percent in the last 1 month, valuation at 17x/14x FY21/ FY22E EPS (vs. 5-year avg. of 20x) is attractive considering strong EPS growth of 21% CAGR over FY20-22E (vs -6% over FY17-19).
Expert: Gaurav Dua, Sr VP, Head – Capital market Strategy & Investments.
Vision to double farm income is one of the priority areas for the NDA government and it reflects in the policy announcements. However, there are external factors like prices of agri commodities, weather conditions among others that can cause delays the set time period to achieve the target of doubling of farm incomes.
From agri space, we like PI Industries, Insecticide India along with other rural economy based companies like Mahindra & Mahindra, Dabur India, Relaxo Footwear, Spandana Spoorthy.
The Budget propose to allocate Rs. 2,83,000 crore for farm, irrigation and rural development and agri-credit target for FY21 set at Rs. 15 lakh crore. Also to expand integrated farming systems in rain-fed areas.
To promote /incentivise the use of organic fertilisers instead of excessive use of chemical fertilisers. The move will benefit players like Insecticides India, PI Industries, Aarti Industries, Atul an SRF.
Spandana Spoorthy Financial Limited (SSFL) is a leading, rural-focused NBFC-MFI with a geographically diversified presence in India. It has a pan India presence across 17 states. The company offers income generation loans under the joint liability group model (JLG), predominantly to women from low-income households in Rural Areas.
Spandana Sphoorty Financial Ltd (SSFL) has reported strong CAGR growth in AUM (~85%), Networth (~43%) and PBT (~200+%) over FY17-FY19 period indicating a strong growth momentum. Over the years, SSFL had built upon expanding its access to funds/capital, even while maintaining an improving rating profile and a conservative Asset quality book and leverage.
Expert: Rusmik Oza, head of fundamental research at Kotak Securities Ltd
We like Escorts and M&M (companies are expecting demand for tractors to be better in FY21 as compared to FY20). Colgate Palmolive in the FMCG space as valuations are undemanding considering the likely RoE of >60% in FY21.
M&M Financial in the NBFC space as it the expertise in lending to rural customers. We don’t see meaningful upside in agrochemical stocks as most of them have rallied and most consumer durable & discretionary companies are trading at extremely rich valuations.
Expert: Deepak Jasani, Head of Retail Research, HDFC Securities.
Agriculture and allied activities, Irrigation and Rural Development - an allocation of about Rs2.83 lakh crore have been made for the year 2020-21. It is positive for seed, fertilizer and agrochemical manufacturers like Coromandel.
For pushing the rural consumption, what is more important is the outcome of the rabi crop, monsoon spread and intensity and the Kharif output. Currently, the expectation on these counts is good.
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